Topley’s Top Ten – July 31st, 2019

Author

Matt Topley
July 31, 2019

1.Software ETF a Double in 3 Years with Many Names Trading at 20x Sales vs. S&P 2x Sales.

The exchange-traded fund (ticker: IGV) is up 32% this year and100% over the past three years.  Many software companies are now valued atmore than 20 times projected 2019 sales—and without any earnings. No majorindustry has a higher valuation. The S&P 500 index is valued at about twotimes sales

Sky-High Software Stocks AreBeginning to Look Like They’re Forming a Bubble–Andrew Bary

IGV-Software ETF

2.Short Interest in Tech Making New Lows.

And Tech shorts have capitulated. Usuallysign of top, says the always negative Zero Hedge – Growth Tech was shredded yesterday

From Dave Lutz at Jones Trading

3.Rate Cuts Near Equity Highs…Historically Positive.

While they are not an explicit component of its mandate, changes in theFed’s monetary policy often have an observable effect on US securities markets.Rate decisions are often discussed as they relate to fixed income markets, asrate movements have a direct and inverse relationship to bond prices. However,as we saw earlier this year when dovish comments from Chair Powell led to anequity rally, fed rate policy can have also have important implications for theUS stocks. So, what’s in store for the US equity market should the Fed cutrates next week as anticipated?

The expected rate reduction from the Fed comes against the backdrop of aUS equity market that has seen each of the major large cap benchmarks hit newall-time highs within the last week. Based on research by John Lewis, SeniorPortfolio Manager at Nasdaq Dorsey Wright, since 1990, when the Fed hasinitiated a rate cut when the S&P 500 SPX waswithin 5% of its high, on average, the index has posted positive returns overthe next one-, three-, six-, nine-, and 12-month period; with an average12-month gain of almost 11%. In fact, the only two occasions when we sawnegative 12-month returns following a rate cut when SPX was within 5% of itshigh were the two successive cuts in September and October 2007, which precededthe global financial crisis. On the other hand, when a rate cut has been initiatedwhen the S&P 500 is more than 15% below its high, on average, the index hasposted negative returns over the next one-, three-, six-, nine-, and 12-monthperiod.

Nasdaq Dorsey Wright.

4.As Tech Explodes in U.S.  ….China Sets Up New Market to Compete with Nasdaq for IPOs.

China Star Market.

What is China’sSTAR Market?BY MARKKOLAKOWSKIThe Shanghai Stock Exchange has created a hotnew market showcasing some of China’s most promising tech companies, all withthe goal of catching up to America’s Nasdaq, the birthplace of many of theworld’s legendary and pathbreaking tech giants. The Shanghai Stock ExchangeScience and Technology Innovation Board is being called the STAR Market forshort by Chinese authorities, and began trading on Monday with 25 listedcompanies. These stocks ended the opening day with sizzling gains ranging from84% to 400%, The Wall Street Journalreports.

“It’s abit crazy, but I think the situation will calm down a bit in the next fewdays,” Jack Zhang, an analyst at BOC International, a securities brokerage and investment banking subsidiary of the Bankof China, told the Journal. He believes that individual investors with anappetite for risky speculation drove most of the first-dayaction.

“Gainswere much stronger than expected, either due to unreasonable IPO pricing orspeculative trading,” Zhu Junchun, a Shanghai-based analyst with LianxunSecurities Co., told Bloomberg. “It’s goingto be a liquidity game in the first half year orone year of trading. Judging by the trading activity and gains on the board,it’s definitely a success,” he added.

KEYTAKEAWAYS

  • The STAR Market is China’s latest challenge to Nasdaq.

  • Its initial listings are IPOs, mainly from tech startups.

  • It allows wider price swings than other Chinese markets.

  • It is the only market in China where loss-making firms can go public.

China STAR Market stocks lose trader interest as ‘temporarycraziness’ wears off, curbs kick in

  • As of Monday, the original 25 STAR stocks have a 20 per centmaximum up or down limit

  • Last week, with no brakes, one stock shot up 520 per cent at onepoint

5.Company Buybacks to Hit $1 Trillion….Level of Buybacks to Free Cash Flow Exceeds 2007.

Companies are ramping up share buybacks, and they’re increasingly using debt to do so 

Key Points

  • Share buybacks are expected to approach $1 trillion this year, according to Goldman Sachs.

  • Funding is coming from a record drawdown in cash as well as a rise in gross debt and leverage.

  • Buybacks have exceeded free cash flow for the first time since the financial crisis.

U.S. companies are on pace to break another record for share repurchases in2019, using a combination of cash and debt to push the total to close to $1trillion.

For the first time since the financial crisis, companies have given backmore to shareholders than they are making in cash net of capital expendituresand interest payments, or free cash flow, according to Goldman Sachscalculations.

The level of buybacks to free cash flow hit 104% for the 12 months endingin the first quarter of 2019, the first time that number has topped 100% duringthe economic recovery that started in 2009. In 2017, the level was 82%.

PKW-Buyback ETF.

6.With International Economic Indicators Slowing…Baltic Dry Index Makes New Highs.

Baltic Dry

Baltic Dry Index –BDI

REVIEWED BY BEVERLY BIRD

 UpdatedApr 12, 2019

What Is the Baltic Dry Index –BDI?

TheBaltic Dry Index (BDI) is a shipping and trade index created by theLondon-based Baltic Exchange. It measures changes in thecost of transporting various raw materials, such as coal and steel.

Membersof the exchange directly contact shipping brokers to assess price levelsfor given shipping paths, aproduct to transport, and time to delivery or speed. The Baltic Dry Index is acomposite of three sub-indices that measure different sizes of dry bulkcarriers or merchant ships: Capesize, Panamax, and Supramax.

How the Baltic Dry Index – BDIWorks

TheBaltic Exchange calculates the index by assessing multiple shipping ratesacross more than 20 routes for each of the BDI component vessels. Analyzingmultiple geographic shipping paths for each index gives depth to the index’scomposite measurement. Members contact dry bulk shippers worldwide to gathertheir prices and they then calculate an average. The Baltic Exchange issues theBDI daily. 

KEYTAKEAWAYS

  • The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component ships.

  • Members contact dry bulk shippers worldwide to gather their prices and they then calculate an average.

  • Many investors consider a rising or contracting index to be a leading indicator of future economic growth.

  • The index can experience high levels of volatility because the supply of large carriers tends to be small with long lead times and high production costs.

The Dutch company Port-Liner is building two giant all-electricbarges dubbed the ‘Tesla ships‘. The company announced that the vessels will beready by this autumn and will be inaugurated by sailing the Wilhelminacanal in the Netherlands.

The 100 million-euro project supported by a €7m subsidy fromthe European Union is expected to have a significant impact on localtransport between the ports of Amsterdam, Antwerp, and Rotterdam.

Chief executive of Port-Liner Ton van Meegen told The Loadstar:

“There are some 7,300 inlandvessels across Europe and more than 5,000 of those are owned by entrepreneursin Belgium and the Netherlands. We can build upwards of 500 a year, but atthat rate it would take some 50 years to get the industry operating on greenenergy.”

The battery-powered barges – pictured above – are capable ofcarrying 280 containers.

The first 6 barges are expected to remove 23,000 trucks from theroads annually in the Netherlands and replace them with zero-emissiontransport.

Port-Liner is developing its own vessels, but they developed abattery pack technology that houses the batteries inside a container.

Meegen says that it could allow them to retrofit existing barges:

“This allows us to retrofit bargesalready in operation, which is a big boost for the industry’s green energycredentials.The containers are charged onshore by carbon-free energy providerEneco, which sources solar power, windmills and renewables.”

The first vessels will complete their maiden voyage laterthis year.

Electrek’s Take

As we have often discussed in the past, all modes oftransportation are gradually being converted to electric propulsion andthat includes maritime transport.

It’s also an important mode of transportation to convert since itproduces a lot of pollution. Some of the world’s largest cargo ships emitpollution comparable to millions of passenger cars put together.

I think it’s an exciting time on that front because we have seenseveral major projects like this one in the past few months. A new all-electric cargoship with a massive 2.4 MWh battery pack in China and two massive all-electricferries in Sweden and Denmark come to mind.

8.Deficits Will Run Well Above 50 Year Average.

Liz Ann Sonders

Debt is the cumulative effect of running budget deficits

It’s amazingto me how often I hear folks (including our politicians…on both side of theaisle) conflate the terms deficit and debt. The latter is the cumulative effectof running the former. As you can see in the chart below, per CongressionalBudget Office (CBO) projections, the U.S. budget deficit is expected to exceed$1 trillion each year starting in 2022; with deficits likely to be well abovethe 50-year average. Outlays are expected to jump to 23% of GDP by 2029, from20.8% this year due to demographics and rising health care costs.

Federal Budget Looking Ahead

Net Interest Payments to Swamp Everything Else

Source:Charles Schwab, CBO (Congressional Budget Office) May 2, 2019 Report: UpdatedBudget Projections: 2019 to 2029.  

9.S&P Tracking Global Money Supply

https://twitter.com/Schuldensuehner

10.Chobani Billionaire Hamdi Ulukaya: To Be Truly Successful, Break These 3 Stupid Business Rules

At TED the self-madebillionaire explained why the usual business playbook is flat-out dumb.

There are few things as American as a classic rags to riches story, and Chobani founder Hamdi Ulukaya seemsto fit this classic narrative to a T. Born into a family of nomadic sheepherders in Turkey, he came to America withjust $3,000 in his pocket and, through hard work, vision, and abit of luck, managed to build a billion-dollar yogurt business.  

But while Ulukaya might seem like the perfect example ofold-fashioned business success, from the TED stage in April (hat tip to Swiss Miss) he explained that his views on what it means to besuccessful are wildly different from the traditional business playbook. 

In fact, rather than seeing himself as the usualpull-yourself-up-by-your-bootstraps capitalist hero, he thinks of himself as an“anti-CEO” calling the shots at his company from the “anti-CEOplaybook.” The typical rules of business success, heflatly declares, are stupid. Here’s what he’s replaced them with. 

1. Businesses exist to maximize shareholder value? Nope. 

“Today’s business books say businesses exist to maximizeprofit for the shareholders. I think that’s the dumbest idea I’ve ever heard inmy life,” Ulukaya says. If businesses shouldn’t try first and foremost tomake money for their owners, what should they aim for? “Businesses shouldtake care of their employees first,” he insists.  

In 2016 Ulukaya took the unusual step of giving his 2,000employees shares in the company. “Some people said it’s PR. Some said it’sa gift. I said, ‘It’s not a gift’… They earned it with their talent and theirhard work,” he explains. 

2. Ask not what your community can do for you; ask what you cando for your community. 

In a veiled swipe at Amazon’s recent HQ2 beauty contest, where cities competed toshow how many tax breaks and incentives they could offer the online behemoth,Ulukaya believes companies shouldn’t approach communities with their hand out.Instead, businesses should go to struggling communities and ask, “How canI help you?” 

“Go search for communities that you can be part of. Ask forpermission and succeed together,” Ulukaya advises, citing the resurgenceof the community around his company’s second factory in rural Idaho to show howthis can work out for the benefit of everyone. 

3. Your boss isn’t the board. It’s the consumer. 

“Today’s playbook says the CEO reports to the board. In myopinion the CEO reports to the consumer,” says Ulukaya. He takes thispoint so seriously that, in the early days of Chobani, the telephone number oneach pot of yogurt was his own personal line. Customers could literally phoneup the CEO to chat. 

“The consumer is in power. That’s the reason businessexists,” he reminds leaders. 

All of which sounds idealistic. And it is. But Ulukaya insistsit is also a recipe for a deeper, more meaningful (and clearly still veryremunerative) kind of success.  

“If you’re right with your people, if you’re right withyour community, if you’re right with your product, you’ll be more profitable,more innovative, and you will have more passionate people working for you and acommunity that supports you,” he concludes.